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Under what circumstances does it make sense to pay points on a mortgage?
Posted on 9/26/16 at 9:30 am
Posted on 9/26/16 at 9:30 am
And if you've got the money to buy down the rate, what's the advantage of doing so rather than just using that same money to lower the principle amount (i.e. put more money down)?
5
Posted on 9/26/16 at 10:01 am to PenguinNinja
It makes sense when the spreads between rates are small. Each rate is obviously not at par, and there are gaps between rates such as having to pay .75 of a point to go down a rate or .25 of a point to go down a rate. For example for 30 year today you might have to only pay .25 to go down to a 3.5% but to go down to the next rate you may have to pay a full point to get 3.375%.
You want to calculate what the cost is of the point. (it is based on a percentage of your loan amount. Whatever that cost is check to see how many months of the loan it would take you to recoup your money. If you want to get real serious with it throw in the time value of the cost of the point over that span to see what the actual cost is.
You want to calculate what the cost is of the point. (it is based on a percentage of your loan amount. Whatever that cost is check to see how many months of the loan it would take you to recoup your money. If you want to get real serious with it throw in the time value of the cost of the point over that span to see what the actual cost is.
Posted on 9/26/16 at 11:08 am to PenguinNinja
quote:
And if you've got the money to buy down the rate, what's the advantage of doing so rather than just using that same money to lower the principle amount (i.e. put more money down)?
if the seller includes buying points in closing and you aren't maxing out their paid closing cost amount.
Posted on 9/26/16 at 12:10 pm to PenguinNinja
How much are we talking here? if $2,000 buys down half a point, that may make more of a difference in the long term vs putting down $2,000 more.
This is a time where you need to fire up MS Excel or a good calculator and just run the numbers.
This is a time where you need to fire up MS Excel or a good calculator and just run the numbers.
Posted on 9/27/16 at 12:53 am to PenguinNinja
That, and if you're borrowing long term money at 3% +/- (historically very low), does it benefit you to prepay the interest? Would/could/should that money be invested and gain a greater return? Including tax considerations, everyone's situation is different. But however you want to figure it, you would need to stay in the loan at least long enough to break even on the outlay of upfront cash.
BTW, a decent rule of thumb is that 1 discount point equals .25% of the mortgage rate. Once you go above 3 points, things can get a little hinky, so most banks don't quote above 3. Plus most people wouldn't sink that much into buying down a rate anyway. Where it typically makes the most sense is when you have a nice closing cost credit from the seller.
BTW, a decent rule of thumb is that 1 discount point equals .25% of the mortgage rate. Once you go above 3 points, things can get a little hinky, so most banks don't quote above 3. Plus most people wouldn't sink that much into buying down a rate anyway. Where it typically makes the most sense is when you have a nice closing cost credit from the seller.
Posted on 9/27/16 at 7:42 am to PenguinNinja
when you are going to be in the house long enough to save more money than it costs to buy the points.
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